How To Start a Cosmetic Business

If you're considering starting a cosmetic business, you probably have many questions. How do I get started in the cosmetics industry? Do I have to be a social media influencer to be successful? What do I need to know about the different types of business structures? Are there any legal requirements for starting a makeup business?

Whether you're still brainstorming or already have your business plan, it helps to have an overview of the process of forming a cosmetics business.

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Legal Structure of a Cosmetics Business

For small business owners and entrepreneurs starting their first startup beauty product business, forming may seem intimidating. But once you decide on the best legal structure for you, there are simple steps to get your legal entity formed.

Sole Proprietorship

A sole proprietorship is the easiest and cheapest business structure to form. You don't have to file paperwork with state or local agencies unless you register a business name.

As a sole proprietor, your personal name would be your business name. You may conduct business under your legal name. If you want to change the name from your personal name to a new name for your cosmetics business, then you have to file a doing business as registration.

There is a downside to forming a sole proprietorship. In a sole proprietorship, personal and business assets are all the same. This could be important if the business has a debt or obligation and someone files a lawsuit against the company.

It could also matter in the case of bankruptcy. With a sole proprietorship, you could lose your personal assets in a judgment against you. Your house, cars, and bank accounts could be at risk if you form a sole proprietorship.

'Doing Business As' Business Name

If you want to use a different name for your business, you must do a DBA (doing business as) filing. A DBA filing would allow you to register and use your assumed name.

For example, Buffy Frasier can do business as "Buffy Frasier" to sell her cosmetic products. She doesn't need to register her personal name as a DBA name. But if Buffy Frasier wishes to do business as "Buffy's Nail Solutions," she must file the fictitious business name with the secretary of state or the appropriate local agency.

Limited Liability Companies

In a limited liability company (LLC), owners don't have personal liability for business debts. Because of this liability protection, someone who sues the business can't reach an LLC owner's personal assets.

But forming an LLC requires more than creating a sole proprietorship. To form an LLC, you must file Articles of Organization with the secretary of state and pay the filing fee. You'll also need an operating agreement.

An LLC operating agreement covers the rights and responsibilities of the organization's members. Before you make an operating agreement, consider who will be an owner of the LLC and what ownership interest they may have. In most states, you don't have to file an operating agreement with any agency.

Corporations

Corporations are complex legal entities. Their owners are called shareholders. Shareholders do not manage a corporation. Officers and a board of directors manage its day-to-day operations. Shareholders, officers, and directors are all part of the corporate structure.

Generally, forming a corporation is more expensive than creating other business entities. However, having limited liability is a benefit of corporations. Also, corporations can issue shares of stock. If you're interested in going public and attracting investors, you can form a corporation.

Process To Open a New Cosmetic Business

Once you've considered the types of business structures, you can begin forming your new cosmetic business.

Go through the following steps to start making your mark in the beauty industry.

Create a Business Plan

A business plan is an outline of how your business will operate. It details your target audience, startup costs, and financial projections. Lenders, investors, and financial institutions typically want to see a business plan before loaning you funds.

Choose a Name for Your Beauty Business

Decide on a name for your business. Make sure no other beauty brands are using this name. You want a name you can trademark. So, it should be unique to your brand, meaning it's not registered with the United States Patent and Trademark Office (USPTO) or in use online.

Apply for an EIN and Licensing

Apply for an Employer Identification Number (EIN) for your cosmetic brand. An EIN is not needed if you are a sole proprietor, but it is needed if you have a DBA and want to open a bank account. Sole proprietors who hire employees or partnerships, LLCs, or corporations must have an EIN. This is a nine-digit number the IRS uses to track your business for tax filings and the industry. Check the North American Identification and Classification System (NAICS) before registering with the IRS for your EIN.

Legally Form Your Own Cosmetics Business

File documents with your secretary of state or county (for an LLC or corporation). Each state has different forms and fees based on the type of business entity you form. Once you form the cosmetic business with the state, you will get a certificate of formation. You'll take this certificate to banks or to prove to someone that you are a legal entity.

Filing Taxes for Your Cosmetic Business

The way the IRS treats your cosmetic business for tax purposes depends on many factors. One of the most important factors is your chosen business structure.

A sole proprietor reports business income on their personal tax return. LLC owners also have "pass-through" taxation. However, an LLC owner can be taxed as an S-corp or C-corp.

An S-corporation is a tax status, not a business entity. If you choose to be taxed as an S-corporation and fill out the appropriate forms, you may save on employment tax.

A corporation is taxed at the corporate rate. Some earnings are also distributed to owners and taxed, creating what some call "double taxation."

Determining Products and Services

Choose a business model for your business idea. An entrepreneur can take many avenues when starting a cosmetic business.

• Will you be an e-commerce business only selling your products online?
• Do you have unique cosmetic formulations that you plan on packing to sell online and in-store?
• Do you just want to sell your cosmetic line on Amazon?
• Will you have ancillary products, like a hair care line, or stick with cosmetics alone?
• Would you rather package your cosmetic formulations and products to sell wholesale to another business? This is a private label or “white labeling," where another business repackages an item to sell in their market.
• How will you make your product stand out in the cosmetic market: high-quality ingredients, vegan ingredients, the specific colors you offer, the specific "look" and feel you will provide, and the cosmetic costs compared to what you charge for services? You'll also want to consider the latest market trends, such as organic makeup.

Consider your target customers and their needs. After doing target market research, you should carefully decide on makeup products. You can easily do this on social media or by using Statista.

FDA Regulation

You might wonder if the Food and Drug Administration (FDA) regulations apply to cosmetic businesses. The answer is yes.

Whether you run your cosmetic company out of your home or use a facility, you are responsible for the safety of your skincare products and for properly labeling them. If you advertise that you work with quality products for your product line, ensure this is a true claim.

Purchase Business Insurance

When you open a storefront, you need general business liability insurance. This will cover injuries that happen on the property, such as a slip and fall. When selling your own product line of makeup, lotions, and soaps, you also need product liability insurance. This will cover any damages done to someone who suffers an allergic reaction using your product.

If you hire employees most states demand you have worker's compensation insurance. This policy covers damages to your employees hurt on the job. Failure to have this insurance in some states will result in fines against your business.

Considering Starting Up a New Cosmetic Business? Talk to an Attorney

You may have questions about your new business or want advice on your best business entity. If you're thinking about entering the cosmetics industry, don't hesitate to contact a business and commercial lawyer for your business needs.